Wednesday, January 15, 2014

4Q2013 Forex Update

[I was supposed to post this last week, but better late than never]

With the new year past, I’ve taken the liberty of updating my proprietary Ringgit trade weighted exchange rate indexes. The Ringgit has taken a hammering in 2013…or has it?

From the MYRUSD perspective, it certainly looks like it (index numbers; monthly averages; 2000=100):


The nominal index ended the year 6.0% down, while the real (inflation-adjusted) index fell 7.5%.

But when you look at the exchange rate holistically, taking into account all Malaysia’s major trade partners, nothing quite so dramatically happened (index numbers; monthly averages; 2000=100):


There was the big jump just before the election, but on a year-on-year basis, the Ringgit only fell 1.6% in nominal terms and 1.8% in real terms, which are less than half the standard deviation of either index from the full sample range I use (2000-onwards).

Translation: the movement of the Ringgit last year was well within the historical experience of the last 14 years.

One thing to note here is the divergence between the nominal and the real index, which in this case is indicative of undervaluation as the nominal index is below the real index. This has been building up since mid-2010 or so, and is unusual as the following chart makes clear:


The above pretty much says that the Ringgit is mostly undervalued, to the tune of between 5%-6%, which is somewhat smaller than the divergence I noted here, though that particular analysis was USD specific.

But as usual, there’s considerable heterogeneity in Malaysia’s bilateral exchange rates, so for the sake of completeness, the following covers Malaysia’s major trading partners (i.e. those I’ve included in the trade weighted indexes). All charts are in log percentage difference since the Ringgit was floated in July 2005 – anything above zero represents appreciation, while anything below denotes depreciation:

Top 5 trading partners:




NIEs (ex-SGD):


Other major trade partners:


Some quick thoughts on the above:

  1. First, note that despite the depreciation against the USD over the past year, the Ringgit hasn’t lost much ground from a long term perspective – it’s still about 15% higher than a decade ago.
  2. MYR has lost ground against the SGD and CNY. Not really surprising, as neither are floating exchange rates and have explicit policies backing currency appreciation in place.
  3. Within ASEAN, the Ringgit, Baht and Peso move more or less together. The Dong lost a lot of ground in 2009-2010, while the Rupiah has come under considerable pressure recently.
  4. Against the NIE currencies, the Ringgit has been generally stable over the past five years, although losing a bit of ground over the past year.
  5. Of the last three, the MYR and AUD maintain the usual tight relationship (both are commodity currencies); is mostly up against the Pound though again losing some ground recently; and separating itself from the Rupee.

One last thing to look at is the evolution in the weights for the indexes, because these are synonymous with a change in Malaysia’s trade patterns. I’m only focusing here on the top 5, because they account for over 60% of Malaysia’s total trade (of the rest, only Thailand and Indonesia exceed 5%):


Note the definite pattern that emerges – the trade shares of Singapore, Europe and Japan are virtually unchanged, while China’s is steadily increasing and the US steadily decreasing.

This doesn’t necessarily mean that trade exposure with the US has fallen – the so-called decoupling thesis – as some of Malaysia’s exports to China will form inputs for China’s exports to the US. However, disentangling the effect is hard if not impossible.

One interesting thing to note is that the combined weight of Malaysia’s China/US trade is fairly stable:


There’s a hint of a declining trend since 2004 (China’s accession to the WTO), but not so much as you’d notice; the rate of decline is in 100ths of a percentage point a year.

Technical Notes:

  1. Exchange rate data from the Pacific Exchange Rate Service
  2. Direction of trade data from various issues of Bank Negara’s Monthly Statistical Bulletin


  1. Hi, for someone who is worse than a novice, could you give me your views on the SGD-MYR exchange rate? SGD is like at an all-time high against MYR. Is it going to continue in the short to medium term?

    1. I wouldn't read too much into the MYR-SGD exchange rates.

      The reasons for SGD strength are well known: safe haven status, triple-A ratings, substantial budget surpluses and MAS's policy for a gradual appreciation of the SGD against a "basket" of currencies to combat imported inflation and to hasten the pace of economic restructuring.

      And being a banking, financial and wealth management hub, there are a lot of funds parked in Singapore - which, although it doesn't directly affect the Sing-MYR exchange rates, does add to the safe haven status.

      I would be more interested to see if Bank Negara will allow full convertibility of the MYR.

    2. @TheSlug

      What Arimnestos said :)

      The SGD will appreciate against the MYR forever, unless there is a significant change in the policy approach at the Monetary Authority of Singapore (MAS).

      The relationship between the two currencies is so close and consistent that some commentators as far back as the 1980s have called the SGD policy regime as essentially a crawling Ringgit peg.

      More details on Singapore's monetary policy approach are available here.

      One thing to note however: while MAS' stated policy is achieve a gradual appreciation of the SGD to maintain stable prices, what this amounts to in practice is MAS constantly slowing the appreciation of the SGD, not boosting it up.

    3. Hi, Hisham

      Just to be mischievous, do you think that Bank Negara is deliberately holding back the MYR from appreciating?

      The implications of the SGD and MYR being on par may be too horrendous to contemplate, although it could, in a fell swoop, stop much of the cross-border "brain drain".

      Incidentally, I note that you haven't commented on what I wrote about full convertibility for the MYR.

    4. @Arimnestos

      Sorry for the late reply, I'm rarely on line on weekends or public holidays.

      1. Short answer - no. Not much has changed since I wrote that.

      2. Re: convertibility - anything I say would be pure speculation, and your guess would be as good as mine. I don't think BNM is fully comfortable with the idea, especially with the experience we had during the 1997-98 crisis.

    5. I understand BNM's concerns.

      But if China ever moves to full convertibility of the yuan/renmimbi, can Malaysia be able to keep the ringgit on the sidelines, so to speak?

      China is an important trading partner of Malaysia, and bilateral trade is set to grow substantially over the next several years.

      With Hong Kong, London and Singapore jockeying to become major RMB trading hubs, how will this impact cross-border financing of Malaysia-China trade? Especially if China moves away from the USD in favour of the RMB?

    6. @Arimnestos

      You might like to read these:

      I don't think financing trade with China will be any kind of issue. And China is hardly alone - these kinds of bilateral arrangements (currency swaps and trade financing) have been done with most of the major Asian trading economies after 1997-98.

      Not all on our part either, as this is a Pan-Asian initiative. We weren't the only ones to suffer. You might want to refer to this.

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